Question

You are installing a fire pump as a part of an existing apartment building. The initial purchase price and installation cost of the pump is $17,000. The pump has an annual maintenance cost of $1,500 which includes all maintenance, inspection, and testing. At the end of the 10 year life of the pump, it is expected to have a salvage value of $2,500. Draw the cash flow and the simplified cash flow diagram.

When you were born, your grandparents put $5,000 into a money market account to help with your college education. The bank gave them a guaranteed interest rate of 5% per year until you turned 18. How much money will be in the account on your 18^th birthday?

Please provide a step by step solution for the question(s) above. If you are unable, or unwilling, to provide a step by step solution please leave it open for those that will. Thank you!

Answer 1

Initial investment (Cash outflow) = $17000 (Year 0)

Annual maintainance (Cash outflow) = $1500 (Year 1 to Year 10)

Salvage value (Cash inflow) = $ 2500 (Year 10)

Depreciation every year using straight line depreciation (Non cash transaction inflow) =Initial investment / no. of useful years = $17000/10 =$1700

Total cash flow is calculated as shown above .

Initial investment at year 0 (PV) = $5000

No. of years (n) = 18 years

Interest rate(r) = 5%

Future value is calculated using time value of money equation FV= PV* ((1+r)^n)

FV= 5000* ((1+ 0.05)^18) = $ 12033.096

On 18th birthday, account will have $12033.096.